How are shareholders treated where a shareholder makes claims against a company in administration? Does an administrator have to give that shareholder notice of creditors’ meetings? Can the same shareholder vote at creditors’ meetings?
Since the 2007 High Court of Australia decision Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160;  HCA 1 (colloquially known as ‘Sons of Gwalia’) much uncertainty has surrounded the treatment and rights of such shareholders.
Sons of Gwalia
At the time of the Sons of Gwalia decision, section 563A of the Corporations Act 2001 (section 563A) provided that debts owed to a person in their capacity as a member of the company (such as dividends) are postponed until debts and claims made by persons otherwise than as members of the company are satisfied.
In Sons of Gwalia, a shareholder claimed damages for being misled into buying worthless shares in the company. The High Court held that the shareholder’s claim arose other than as a member of the company. This approach had the effect of treating such claims differently to other more standard categories of shareholder claims such as loans to the company.
This meant that the shareholder’s claim was not postponed behind other claims against the company. An administrator in such circumstances would need to treat the ‘non-member’ shareholder claimant in the same way as any other creditor, i.e. give them notice of creditors’ meetings and recognise their entitlement to vote with the general body of creditors.
Parliamentary amendment of section 563A and new section 600H
In an effort to reverse Sons of Gwalia, on 18 December 2010 Parliament brought into effect an amended section 563A and a new section 600H. Despite those efforts, ambiguities in the wording of the new provisions led to further uncertainty.
The amended section 563A provides that ‘subordinate’ claims are postponed until all other debts and claims are satisfied. The definition of subordinate claims includes dealing in shares in the company. The aim of this amendment was to capture ‘Sons of Gwalia’ style claims and ensure they are ‘subordinate’ claims.
The new section 600H provides that a person who has a claim ‘postponed’ under section 563A is only entitled to receive notices to creditors if they ask the administrator in writing. That same person has no right to vote except where granted that right by Court order.
The ambiguity arises due to the wording of section 563A which on one reading purports to apply only in the event of a winding-up and not to administrations.
Clarity for administrators
Last year Polczynski Lawyers (now Polczynski Robinson) acted on behalf of administrators in a case directly addressing the ambiguity in the matter of Heesh (as joint and several administrators of QRxPharma Ltd) (Admins Apptd)  FCA 1140 (QRx). In QRx the administrators successfully argued that despite legislative ambiguities, sections 563A and 600H did indeed have the effect of postponing ‘Sons of Gwalia’ style shareholder claims in a company administration provided the claim arose after 18 December 2010. The decision provides welcome clarity for administrators, creditors and lawyers alike.
The QRx Case
QRx was factually similar to Sons of Gwalia. Shareholders had anticipated making claims that false and misleading statements had induced them to purchase shares in the company. The administrators argued that it was Parliament’s intention that section 600H applies to administrations. The Court agreed and made an order that section 600H applies to postpone claims which arose after 18 December 2010.
The effect of QRx case is that the Sons of Gwalia regime will continue to apply to shareholder claims which arise prior to 18 December 2010. After that date the amended sections 563A and 600H take effect and the QRx regime will apply.
Administrators need to remain aware that even in the same administration you may have shareholder claims arising either side of the 18 December 2010 border between the two regimes. Individual shareholder claims should be analysed against the regime in which the claims arise and the shareholder entitlement to receive notices and to vote dealt with accordingly.
For more information, please contact Stephen Polczysnki or Kylie Tate on 02 9234 1500.